Edited by Patrick Artus, André Cartapanis and Florence Legros
Chapter 8: Regional Integration and the Issue of Choosing an Appropriate Exchange Rate Regime in Latin America
Hubert Escaith, Christian Ghymers and Rogerio Studart* INTRODUCTION In the 1990s signiﬁcant changes in macroeconomic policies and structural reforms in Latin America and the Caribbean (here after referred to as LAC) led to a convergence in macroeconomic policies, objectives and instruments, as well as a clear increase in the interdependencies of these national economies on both the trade and the ﬁnancial fronts. In addition, as a result of ﬁnancial globalization, economic events in one country produce direct impacts on ﬁnancial spreads in the whole region. Despite this increased convergence of policy orientation and interdependency, macroeconomic policies are still uncoordinated and continue to be made in close-knit national circles without considering any spillovers at all. In particular there is a disturbing picture concerning national choices of exchange rate regime, characterized by two clear trends: (1) a general increase in the ﬂexibility of exchange rates, that is a larger number of countries adopting ﬂoating schemes or widening the existing range for ﬂuctuations; and (2) a signiﬁcant polarization towards the corners of the range of possible systems: either pure ﬂoats or dollarization and currency boards. This chapter contends ﬁrst that, due to external ﬁnancial shocks and to the diﬃculties of sustaining coherent macroeconomic policies in the region, exchange rate regimes in Latin America tend also to be highly vulnerable; and that the adoption of ‘corner solutions’ does not solve these problems, but also tends to create even further macroeconomic imbalances and vulnerability. Second, we claim that even though Latin American...
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